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Market Commentary: July 2012

Market Commentary: July 2012

Market Commentary: July 2012

 

Is this 2008 or 2012? A presidential election year, a financial crisis, a poor real estate market, and higher than usual unemployment mark them both. You could be forgiven for thinking we have gone back in time.

 

There are many differences to be sure. Europe’s economic peril is the pressure point rather than the U.S. banking system. The stock market is tepid, but thankfully, we have not seen the 30-40% drops that were so common in 2008. The largest difference between now and then, in my view, is the tremendous amount of political tension around the world that seems to have seized more attention than even the difficult economic realities. What does this mean for your investments? What is a reasonable course and are you taking it? Before I address these questions, let us look back at the quarter and year performances in the chart below.

 

 

Benchmark Index

3 month return

12 month return

U.S. Stocks

S&P 500

-3.3%

3.1%

 

U.S. Total Stock Market

-3.7%

1.7%

 

NASDAQ

-5.1%

5.8%

International Stocks

DJ World (ex. U.S.)

-8.9%

-17.2%

Fixed Income

Short Term Bonds

-0.1%

0.2%

 

TIPS (Treasury Inflation Protected Securities)

2.0%

9.0%

 

Intermediate Term Bonds

2.0%

6.0%

 

Aggregate Bond Market

1.5%

4.0%

We know that equities have an advantage over bonds in the long-term, but that is not the case today. The recent performance data have bonds firmly ahead of the stock indexes, reflecting the ongoing uncertainty, but interestingly, less so than six months ago. Back in January, the lagging one-year return for all equities was negative. Today, the 12 month return has turned positive for all but international stocks which continue to convey the angsts about the EU crisis and Chinese recession. Here in the U.S., we could easily see stocks return to negative territory as we approach, among other things, the presidential election and the “fiscal cliff” decision for our own politicians. [“Fiscal Cliff” is the fear-inducing term intended to describe changes in federal tax and spending at the end of the year; taxes are set to rise $600 billion and spending will drop by $130 billion.] Meanwhile, individuals and businesses are making adjustments to the changes in the economic environment.

 

In most cases like this, when global markets focus on the moves of political decision makers instead of the factors underlying the economics of publicly traded companies, normal risk and return correlations do not exist. Given the political shifts occurring in the U.S., Europe, China, and the Middle East, we could see more of this inverse risk/return relationship for a while. From an investment perspective, one should hope that 2012 is in fact similar to 2008 because in the year that followed, 2009, there was a strong return to normal – equity markets soared. [Did you know that 70% of the best days in the stock market occur within two weeks of its worst day? And 100% of the best stock market days occur within six months of its worst day?] How will the world look in five years? It is impossible to know. Even as we watch Europe’s existing monetary union painfully transform into something different (a fiscal union with different members?) which may lead to a political union, we are cognizant we are watching history in the making. We know for certain, regardless of the outcome, that capital will flow to where the expected returns are the greatest, and your portfolio must be ready.

 

I usually close with an applicable quote, but this time the paragraph below from my favorite investment expert, Benjamin Graham, provides good substance for the perspective and strategies we have for your investments. “It is no difficult trick to bring a great deal of energy, study, and native ability into Wall Street and to end up with losses instead of profits. These virtues, if channeled in the wrong directions, become indistinguishable from handicaps. Thus it is most essential that the enterprising investor start with a clear conception as to which courses of action offer reasonable chances of success and which do not. We are thus led to the following logical if disconcerting conclusion: To enjoy a reasonable chance for continued better than average results, the investor must follow policies which are (1) inherently sound and promising, and (2) are not popular in Wall Street.” Following Graham’s precepts, your investment portfolio is certainly built on sound policies; we have worked hard to construct and maintain them this way. It is an added benefit that this strategy is also generally not popular on Wall Street. This should give you a good measure of confidence.

 

Thank you for your trust. Every day we are grateful. We look forward to hearing about you, your family, and the wonderful summer you are experiencing.

Best Regards,

Carl Amos Johnson

 

Carl Amos Johnson, MBA, CFP®, AIF®

Ames Planning Associates, Inc.

9 Vose Farm Road, P.O. Box 396

Peterborough, NH 03458-0396

800-258-9939

Please visit us at www.amesplanning.com

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